Investors are bracing for another volatile week in the markets as bankers and policy makers deal with the fallout from their bid to rescue Bear Stearns.
For now, the prospect of a new wave of consolidation in the beleaguered financial services industry seems remote. That is because would-be acquirers and everyday investors alike have lost faith in the values that Wall Street firms are placing on their own assets.
Of particular concern are the so-called marks placed on mortgage-linked investments like those that undid Bear Stearns, prompting a run on the firm that led the Federal Reserve and JPMorgan Chase to throw Bear Stearns a financial lifeline last week.
James E. Cayne, the chairman of Bear Stearns, mused eight years ago that he might consider selling the 85-year-old bank for a lofty price of four times what it values itself on its books. But now such a notion seems absurd %26#151; and not just for Bear Stearns.
The unhappy experience of Bear Stearns proves that it is a lack of confidence, not capital, that ultimately topples even the savviest financial institutions.
%26#8220;Once you have a run on the bank you are in a death spiral and your assets become worthless,%26#8221; said David Trone, a brokerage analyst at Fox Pitt Kelton.
In all-day meetings over the weekend, Alan D. Schwartz, the chief executive of Bear Stearns, met with his top executives at the firm%26#8217;s Madison Avenue headquarters, trying desperately to persuade skeptical potential suitors that the firm was worth buying.
But the market had already passed a harsh judgment on Bear Stearns. On Friday, its stock plunged 47 percent, closing at $30. At that price, its shares were trading at a gaping 62 percent discount to the $80 book value that the firm has reported, reflecting the broad view that the fallout from the credit crisis had permanently devastated Bear Stearns%26#8217;s core mortgage operations.
In Washington, the Treasury secretary, Henry M. Paulson Jr., signaled strong support for the Fed%26#8217;s role in supplying a lifeline to Bear Stearns during the crisis negotiations, saying that his priority was to stabilize the financial system and to worry less right now about the problem of avoiding a %26#8220;moral hazard%26#8221; by bailing out errant institutions.
%26#8220;We%26#8217;re very aware of moral hazard,%26#8221; Mr. Paulson said in a television interview with George Stephanopoulos on ABC. %26#8220;But our primary concern right now %26#151; my primary concern %26#151; is the stability of our financial system, the orderliness of the markets. And that%26#8217;s where our focus is.%26#8221;
Indeed, investors are taking a grim view of the prospects for other investment banks like Lehman Brothers and Merrill Lynch. Managers of hedge funds and mutual funds say the problems at Bear confirmed their worst fears about the brokerages %26#151; that they have relied too much on leverage and have done a poor job managing the risks they took on during the boom.
The price of insurance on investment banks has surged in the last few days and is exponentially higher than it was last spring. Credit default swaps that offer protection on Bear Stearns debt traded as low as $35 per $10,000 of bonds in May. As of last Friday, the cost was $830.
Shares of investment banks in the Standard %26#38; Poor%26#8217;s 500-stock index are down nearly 28 percent so far this year, and stock futures on Friday showed that a few investors were betting that Bear Stearns stock could lose virtually all of its value in the next few weeks.
%26#8220;People have started to realize the risks that are there,%26#8221; said Steven Gross, a principal at Penso Capital Markets, an investment firm in Cedarhurst, N.Y. %26#8220;The question is have we reached the bottom.
Citigroup, one of the nation%26#8217;s largest banking companies, is now trading below its book value. Lehman Brothers, at $39, is trading just below the book value it reported at the end of last year. This year, Bear%26#8217;s stock is down 65 percent and Lehman%26#8217;s has sunk 40 percent.
Bear Stearns, one of Wall Street%26#8217;s oldest investment banks, had a market value of $4.1 billion as of last Friday.
But the market did not put much faith in the Fed%26#8217;s bailout of the firm, announced on Friday. Bear Stearns%26#8217;s hedge fund servicing business and its clearing operations have traditionally been profitable operations, although they have suffered in recent months as investors and lenders have lost confidence.
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